IPO University

Short Sale

A tactic used when an investor expects a company’s shares to decline in price. The investor borrows shares from an entity that owns the shares and sells them on the market. In return, the lender is entitled to interest on the shares borrowed and a return of the shares. A position is considered closed out when the investor buys back the shares and returns them to the original owner. This is known as covering. IPOs can create opportunities for a short sale as they are untested in public markets and generally more volatile. However, you should expect higher borrowing costs given the volatility and relatively lower float.